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U.S. Supreme Court Overturns Quill, Opens Door for States to Require Sales Tax Collection by Virtually All Remote Sellers

Posted on Jun 22, 2018

By Bob Heller, JD LLM and Joe Haberzetle, JD LLM

In a momentous decision that is likely to have far-reaching effects on retail commerce, the Supreme Court ruled 5-4 that states may require remote sellers (those without any physical presence) to collect and remit sales tax on sales to in-state residents and businesses.

Although the Court’s choice to overturn 51 years of precedent was not altogether unexpected, it will nonetheless require businesses that sell on a multistate basis to make some impactful and immediate decisions on how to operate in the post-Quill world.

A few thoughts on the Court’s June 21, 2018 decision in South Dakota v. Wayfair, and its impact (short-term and longer-term) on both remote sellers and consumers:

The Court threw out the old rule, but didn’t provide clear guidance on exactly when a seller must collect tax on remote sales.

The Court’s majority opinion held that its earlier decisions in National Bellas Hess v. Illinois (1967) and Quill v. North Dakota (1992) were wrongly decided, insofar as they provided that physical presence was a prerequisite for substantial nexus under the dormant Commerce Clause of the U.S. Constitution. The Court found that these earlier decisions had resulted in an “online sales tax loophole” or “judicially created tax shelter” for remote sellers, which “creates rather than resolves market distortions.” Holding that “the physical presence rule is artificial in its entirety,” the Court had no trouble overturning it. However, the decision provides no real guidance on what minimum level of activity or sales into a state would be sufficient to create substantial nexus and an obligation to collect tax post-Quill.

The Court remanded the case to the South Dakota Supreme Court to determine whether the state’s law meets other constitutional requirements. In remanding the case, the Court noted favorably that other constitutional concerns may be satisfied by the law’s sales and transaction thresholds, the bar on retroactive enforcement, and the adoption by South Dakota of certain uniformity and simplification provisions of the Streamlined Sales and Use Tax Agreement.

Congress could provide a new set of rules –but will it?

Both the Court’s majority and dissenting opinions stress that Congress could create a new set of rules for sales tax collection on remote sales, if it chooses to act. Acknowledging that its decision may create significant new compliance burdens on remote sellers, the majority points out that “Congress may legislate to address these problems if it deems it necessary and fit to do so.”

The dissent is more pointed – although agreeing that Bellas Hess was wrongly decided, it argues that “Any alteration to [the physical presence rule] with the potential to disrupt the development of such a critical segment of the economy should be undertaken by Congress.” It remains to be seen whether and when Congress will act.

How will the states react?

A number of states have enacted laws in the past several years similar to the South Dakota law at issue in Wayfair, which requires sellers to collect tax if they make more than $100,000 of sales or have more than 200 sales transactions per year with customers there. Although the South Dakota law bars retroactive assessments of uncollected sales tax, some of the similar laws in other states do not. However, states will face their own administrative burdens in bringing a raft of remote sellers into their taxing systems rather quickly.

Given the Court’s approving statements regarding the South Dakota law’s bar on retroactive enforcement, one would hope that most states will focus on getting remote sellers to collect and remit tax going forward rather than assessing uncollected tax for past periods. Many of the states that have not yet enacted South Dakota-style laws will likely rush to do so; but, here again one hopes that the states will set a specific date on which remote sellers must begin to collect tax, rather than imposing retroactive liability for uncollected taxes. It is important to note that there is nothing to prevent states from assessing tax for prior periods on sellers who had a physical presence inside their borders prior to the Wayfair decision.

How should remote sellers react?

This will obviously depend on many factors, including whether the seller has had any physical presence in states where it has not collected tax, what its sales volumes are in the various states, whether its products and services are even subject to sales tax in the states where its customers are located, and more. Some remote sellers may want to consider registering and collecting tax in all states in which they make sales. For others, a more cautious approach may be justified.

Careful consideration should be given to whether liability exists for uncollected tax resulting from past in-state activities. It is probably not advisable to register and begin collecting tax prospectively as prior periods will remain open for assessment. Voluntary disclosure programs where the look-back period for uncollected tax is limited and penalties are waived are available in every state to address past exposure.

The best strategy for coming into compliance may vary significantly from company to company based on the specific facts involved. For those sellers that wish to register and begin collecting tax, consideration should be given to the cost of compliance. Sales tax compliance software is available and may provide a cost-effective way to manage tax collection and filing returns.

How will consumers be impacted?

The immediate impact may be minimal. Some of the largest remote sellers already collect tax in all or virtually all the states where they have customers. And, as discussed above, it will likely take some time for the states to bring other remote sellers into compliance, and for those sellers to implement broad-based sales tax collection. In the long run, however, it is likely that consumers will be paying sales tax on most remote purchases that currently go untaxed.

Although there may still be small seller exceptions and other provisions that allow some sales to escape taxation, the likelihood is that absent action by Congress to limit their authority, states will act aggressively to require tax collection on remote sales and sellers will eventually be brought into compliance. The days of widespread tax-free buying from internet and catalog vendors are almost certainly a thing of the past.

For more information on how the Wayfair decision may apply to your specific facts, contact any member of the Clark Nuber state and local tax team, or your own tax advisors.